Int'l trade, policy gauge

C. Stuart Callison, Economist, Jakarta

The June 12th edition of The Jakarta Post carried an op-ed piece by Alan Tonelson, research fellow, U.S. Business and Industry Council Education Foundation, indicating it came from the Washington Post. The headline announced that "Foreign trade (is) not a universal panacea" to reduce poverty abroad and reduce an inclination toward violence and terrorism, as America's leaders believe -- although a later quotation indicates the American position is simply that trade will "help" provide answers, not that it is viewed as a panacea.

Having thus set up a straw man, Tonelson argues that the rapid increase in trade during the 1990s has not had a positive impact on wages or poverty "alleviation" and therefore trade cannot be relied on to "drain the swamp" of terrorists.

Leaving aside observations of other analysts that most of the world's terrorists come not from the poorest elements of society, but rather from a literate, unfranchised middle class, Tonelson's analysis of the impact of trade is deficient and misleading.

His key examples come from a Werner International survey of wage rate history in the apparel industry, claiming real wage rates declined in the 1990s while apparel exports increased many- fold, citing data from Pakistan and Mexico. However, he ignores the concurrent many-fold increase in the numbers of workers employed. That those workers chose to work in the apparel industry indicates they could earn more there than in alternative employment opportunities.

Poverty was therefore reduced in many thousands of households by the new jobs created by expanding exports. This effect surely overwhelmed the impact of a percentage drop in real wages for those who already held such jobs, whatever the cause of that drop (real wages are expected to fall where the total labor force grows faster than job creation).

Tonelson then cites evidence that real wages fell, during this same period of economic and export expansion, across all economic sectors in China, Indonesia and the Philippines as further buttressing his thesis. He observes that "the developing world is drowning in labor" and that the "worldwide labor glut depresses the value of workers," while globalization has increased competition among countries pursuing export-led growth strategies, at a time when "the U.S. market is already saturated with imports." So, he asks, "How much more export growth can take place..?"

At least some of his data is simply wrong. Real wages in Indonesia increased 5-6 percent annually from 1990 to 1997, while modern sector employment grew dramatically. Further analysis would have revealed significantly higher employment growth and greater declines in poverty rates in the more export-oriented economies (like Korea, Malaysia, Thailand, Indonesia), compared with countries less open to world trade.

But of course it is precisely the huge overhang of workers looking for better jobs that keeps real wages low. The only way to increase real wages across all sectors, in a country with high unemployment and underemployment and low traditional/informal sector productivity, is first to achieve full employment in productive sectors (not with public make-work activities). When employers have to bid against each other for more workers, real wages will rise on a sustainable basis. Growth in labor- intensive export industries is an important contributor to this process by providing more jobs at whatever the current market wage rates are.

The U.S. is a major export market for developing countries, and as its per capita income and GDP continue to grow, its imports will continue to grow. The economies of many other countries around the world are growing, and despite the import restrictions Tonelson mentions, their markets for developing country exports will also continue to grow. The hallowed economic principle of comparative advantage will even work to increase two-way trade with the likes of China, to the benefit of all sides, and fear of overwhelming Chinese economic competition is misplaced.

However, while export growth can help a country increase employment and earn foreign exchange, an export policy orientation is more important than that. Most of a country's resources -- labor, land and capital -- are devoted to production for the domestic market. An export policy orientation directs investment into those activities that make better use of more abundant domestic resources, such as labor and land instead of scarcer capital -- into efficient import substitution, for example, in addition to export production -- thereby providing more jobs per unit of investment than would protected capital- intensive industries.

In the effort to reduce poverty this is probably the most important impact of trade-oriented economic policies -- directing domestic and foreign investment alike into those activities that create more productive jobs for the nation's workforce until full employment, and the consequent sustained increase in real wage rates, can be achieved. The growth of foreign trade is thus a policy barometer for all economic activities, and not simply an end in itself.